In the first week of March share prices surged on the New York Stock
Exchange followed by other major exchanges. Does this signify a revival
of the global capitalist economy?

The Financial Times was quick to note that “little of investors’
exuberance is reflected in core economic data… The US and the UK ended
the year stagnant; the eurozone and Japan in renewed recession; the
emerging world slowing down”. (Stock Markets Defy Economic Woes, 6 March)

“Asia’s economic recovery is losing momentum and Europe’s slump is
proving deeper than expected, raising concerns that soaring stock
markets globally have jumped ahead of economic reality”.
(Evans-Pritchard, Booming Stock Markets Belie World Economy, Daily
Telegraph, 12 March) There is a glaring contradiction between soaring
shares and the real economy, a symptom of the peculiar conjuncture of
world capitalism.

The Dow Jones Industrial Average (DJIA), an index of 30 ‘blue-chip’
corporations, reached a record high on 4 March, following a 54% fall
during the 2007-09 slump. When adjusted for inflation, however, the DJIA
is still 10% below its 2007 peak. Nevertheless, this is still an amazing
recovery given the stagnation of the world economy.

Writing in the Financial Times, Chris Giles refers to “persistent weak
growth” of the advanced capitalist economies. “While International
Monetary Fund data show advanced economies grew only 1.3% in the five
years between 2007 and 2012, the degree to which economies are pulling
themselves out of their woes is much harder to discern amid often
conflicting data”. (Little Recovery in Advanced Economies, 5 March)

Giles refers to a new statistical technique of combining various types
of data to provide a composite index of economic progress. “The
research… suggests that US economic news has been no better than normal
and the country’s recovery has been characterised by mini-cycles of
moderately good, then bad, data since 2010”. He quotes a professor Beber
of Cass Business School as saying “since the crisis, the US has been
chugging along around zero. Each time the recovery looks like it’s
picking up, it then falls back”.

Referring to the eurozone, Giles comments that “around 2010, indicators
of growth were strong in the single currency area [following big
stimulus packages by the major EU economies]… but the positive data fell
away in 2011 and is now significantly worse than historic norms”.

“The UK is still marred in the weak economic data it has become used to
since 2011, with the index remaining reasonably stable at subpar
levels”. This describes a depression, not as deep as the 1930s but a
period of weak cyclical growth in which capitalism fails to overcome the
obstacles to growth and rise decisively above its previous peaks.

But why, in this dismal situation, have share prices shot up? The
immediate trigger seems to have been the US employment figures for
February, which showed an increase of 236,000 jobs, higher than the
expected 165,000. A big factor in this was the increase in construction
jobs, due to more favourable weather. The unemployment rate fell to
7.7%. This was taken by financial markets as indicating a continuation,
if not a pick-up, in the painfully slow recovery of the US economy.
However, while the unemployment rate fell (based on the number of
workers seeking jobs), the labour force participation rate actually
fell. The employment-to-population ratio (EPOP) has fallen from 63% in
2007 to 58.6% currently. There are still fewer workers in employment
than there were before the great recession.

Also driving the surge in share prices is the continuation of low
interest rate policies and massive liquidity creation by major central
banks. The US Federal Reserve has pumped around $3 trillion into the
economy since 2007, and has made it clear that it will carry on creating
credit until there is sustained growth. The Bank of England has pumped
in £375 billion of quantitative easing. China has expanded total
domestic credit from $9 trillion to $23 trillion over the last four
years, while Japan is about to embark on another programme of state
stimulus and credit expansion.

The expanded credit is meant to feed into the economy to stimulate
investment, increase production and consumption. In reality, the
continued flood of credit has had a perverse effect. The credit squeeze
for small businesses, home-buyers and consumers has continued as banks
rebuild their capital reserves. Meanwhile, most of the additional
liquidity has flowed into financial markets. The sharp rise in share
prices, in fact, is an indication that the ultra-cheap credit is
creating a new share-price bubble. This could pop at any time. Even
before March is out, the Cyprus crisis is causing renewed jitters on
world stock exchanges.

The yields from government bonds are currently extremely low, in fact
negative in inflation-adjusted terms. This is also one of the effects of
increased central bank liquidity, which allows governments to borrow at
near-zero rates. Investors flush with cash, therefore, have turned to
company shares in search of higher returns. Wealthy investors are also
encouraged by the prospect of increased returns from profitable
companies (from dividend payments or capital gains on selling shares at
higher prices). The higher corporate profits come from the intensified
exploitation of workers. “With millions still out of work, companies
face little pressure to raise salaries, while productivity gains allow
them to increase sales without adding workers. ‘So far in this recovery,
corporations have captured an unusually high share of the income gains’,
said Ethan Harris, co-head of global economics at Bank of America
Merrill Lynch”. (Nelson Schwarz, Recovery in US Lifting Profits, New
York Times, 3 March)

“As a percentage of national income, corporate profits stood at 14.2% in
the third quarter of 2012, the largest share at any time since 1950,
while the portion of income that went to employees was 61.7%, near its
lowest point since 1966. In recent years the shift has accelerated
during the slow recovery that followed the financial crisis and ensuing
recession of 2008/09”. (Schwarz) The big corporations continue to apply
new technology to reduce their need for labour, as well as relying on
cheaper labour in low-cost countries.

The big corporations are also following a policy of pushing up their
share prices by buying back their own shares. This amounts to a cash
hand-out to their shareholders, which artificially raises share prices
by increasing the profit-per-share. This is carried out partly by using
their huge cash reserves and partly through borrowing cheap money in
order to subsidise the buy-backs. Historically, stock markets were a
source of funds for investment in companies. Such is the irrationality
of present-day capitalism, that the opposite is the case: there is a
massive transfer of funds from profitable companies to shareholders.

The Financial Times Lex column explains: “Companies have been enjoying
record profitability. But they are using it on dividends and share
buy-backs, which last year reached a combined level surpassed only in
2007. S&P 500 companies paid out slightly less than 90% of net income on
dividends and buy-backs last year, S&P’s data show. They are spending to
keep per-share earnings and dividends rising. Investors are happy. But
it is not easy to see how companies can accelerate the pace at which
they return cash. Unlike consumers, they are as leveraged [indebted] as
ever”. (13 March)

Steve Rothwell (Associated Press) writes: “Companies have also been
hoarding cash. The amount of cash and cash-equivalents being held by
companies listed in the S&P 500 climbed to an all-time high $1 trillion
at the end of September, 65% more than five years ago, according to S&P
Dow Jones indices”. (AP, Housing and Jobs Key to Lifting S&P to Record,
28 December 2012)

Moreover, a large chunk of US corporations’ record profits are hidden
away in offshore tax havens (like Bermuda and the Cayman Islands). The
Wall Street Journal found that the 60 largest companies moved $166
billion offshore in 2012, shielding 40% of their earnings [profits] from
American taxes and costing the US billions in lost revenue.

Just 19 of the 60 companies disclosed their potential tax liability
which totalled $98 billion – more than the $85 billion in the automatic,
across-the-board spending cuts triggered recently following the US
Congress’s failure to agree a budget.

Capitalists invest and produce goods and services to make profits. But
it is clear from the current situation that short-term profits are in
themselves not sufficient to bring about increased investment. How has
this come about? In the closing phase of the post-war upswing after 1968
capitalists of the advanced countries were hit by a decline in
profitability. After a period of ‘stagflation’ (low growth, high
unemployment, but high inflation), they turned after 1980 to the
unprecedented expansion of credit and financial speculation. The
neo-liberal policies accompanying this turn helped create the conditions
for super-profits and the extreme polarisation of wealth throughout the
capitalist world.

Now, most of the big corporations are reaping huge profits. But because
of overcapacity in many industries and weak consumer demand (because of
reduced incomes and public spending cuts), corporations and their
financial masters see insufficient openings for profitable investments.
Paul Krugman sums it up: “Not only are workers failing to share in the
fruits of their own rising productivity, hundreds of billions of dollars
are piling up in the treasuries of corporations that, facing weak
consumer demand, see no reason to put those dollars to work”. (The
Market Speaks, New York Times, 7 March) Krugman calls for a massive
increase in public spending to stimulate demand. While this would give a
temporary boost to the economy, it would not necessarily create the
conditions for profitable investment by the capitalists, the
precondition for sustained growth within capitalism.

Meanwhile, as one commentator puts it, corporate profits continue to
“eat” the economy. (Derek Thompson, Corporate Profits are Eating the
Economy’, New Atlantic, 4 March) The chart (based on US data) shows
that, from 1970 to the mid-1990s, the growth of corporate profits
approximately followed the growth of GDP and workers’ income. Then
“corporate profits began to take off, relative to GDP growth, in the
1990s, before exploding in the last decade”. Profits plunged during the
2008 crisis, but have since recovered to new heights (the finance sector
now accounts for roughly half of US corporate profits).

“When the economy crashes [says Thompson], we all crash together:
corporate profits, employment, and growth. But when the economy
recovers, we don’t recover together…”